The young winger is currently on a 2nd loan spell at Millwall but the club wanted to tie him down to a further year on top of his curent deal that was due to run out in the summer.
Royals director of football Nick Hammond believes Henry has an exciting future ahead of him.
"James is an exciting player who is still very young," Hammond told the club's official website.
"He is continuing his football education at Millwall and is a player we have high hopes for in the future."